Economist, Telegraph Columnist, Broadcaster

When It Comes to A Brexit Deal The UK Can Call The Shots

Events are moving fast in post-referendum Britain. Writing a newspaper column at a time like this is a proverbial “leap in the dark”. With major political developments happening hourly, and financial markets responding in kind, a humble scribe can only take a deep breath and hope not to be overtaken by events.

I’ll avoid the ferocious Conservative and Labour party leadership battles, suffice to say we shouldn’t be surprised they’re happening. A Leave vote was always going to cause massive upheaval at Westminster and raw politics rarely inspires public confidence. Having backed Remain, David Cameron had no choice but to resign after ending up on the losing side. Jeremy Corbyn too, since becoming an unlikely Labour party leader last September, has been on borrowed time.

“The UK is adrift,” we’re repeatedly told. “There’s no plan,” others cry. Since this referendum result nine days ago, embittered Remain supporters have maintained a constant drumbeat of Brexit-related negativity. Their aim is to play on pique and provoke panic, agitating for a re-run and a different result. Yet the people have spoken, clearly and decisively, to quit the European Union. So let’s debate how we Brexit and precisely what Brexit means. But let’s stop arguing about if we Brexit. That is a dangerous affront to democracy.

The current political chaos is inevitable, given the extent to which Leave’s victory shattered mainstream political illusions. Before we can even think about starting complex Brexit negotiations with the EU, we need a new government. The Conservative Leader and de facto Prime Minister will be known on 2nd September. A stable HM Opposition is also required to hopefully hold the Tories to account. For all the lurid post-Brexit party struggles, none of this is surprising.

As for there being “no plan” and “so much uncertainty” – well, that’s the nature of complex diplomacy. Once the UK invokes Article 50, we’ll start a negotiation lasting up to two years – or even longer. Again, that’s not unexpected. The referendum campaign was full of debate about “what deal can we get” and “what Brussels will and won’t accept”. This was always going to be a negotiated outcome.

What of the deal itself? Clearly, under a points-based system, annual immigration will be lower than the near-record net 330,000 figure chalked-up in 2015. I suspect the UK will try to get as much access to EU markets as we can given control over our borders. No-one yet knows the precise trade-off – and how could they? Again, the negotiations haven’t started.

What we do know is our EU trade deficit – a huge £24bn during the three months to April – gives us leverage. Already, way before formal negotiations, the largest German industrial lobby says it would be “very, very foolish” to hinder free trade with the UK. French politicians, too, urged on by their ferocious export lobby, are showing signs of playing nice.

“Ah, but the rules of the single market mean giving up border controls,” we constantly hear from Remain campaigners. Well, we’ll see. Yes, I know that’s what Norway accepted, but our economy is nine-times bigger and we’re a front-ranking strategic and military power. As for Brussels’ “rules”, they’re words on pieces of paper, subject to whatever political interpretation is subsequently agreed.

The sacred “stability and growth pact” – limiting each countries budget deficit to 2pc once the euro was launched – that lasted less than two years. The “no-bail-out” clause protecting members from bankrolling other nations – torn up once the euro started to collapse. It could well be the same with the single market and open borders. Yes, there’s a link in theory. But, in practice, if politics needs to break it, it will break.

For many Leave voters, this Brexit referendum wasn’t about stopping but controlling immigration. To remain a tolerant, outward-looking society, the UK needs to restore public confidence and consent, with our own elected government – no-one else – setting and enforcing annual immigration limits, providing the skills and labour the economy needs, while also planning in terms of required public services and infrastructure. That’s an entirely reasonable view, shared by tens of millions of voters across the EU. It’s also the policy adopted by other countries with vibrant immigrant cultures – such as Canada, New Zealand and the US. When it comes to our Brexit trade-off, then, on both free trade and open borders, the UK holds strong cards.

At the time of writing, the FTSE-100 index of leading shares is at a ten-month high. The FTSE-250, more representative of UK-focused companies, has also recovered most Brexit losses. Markets go up and down, and I maintain my long-standing concerns about the fragility of the global financial system. It’s clear, though, the financial collapse many Remain campaigners warned of before the referendum, and appear to have been hoping for since Leave won, hasn’t happened.

The pound has fallen, of course, but that’s mainly because of the weight of money on Remain – with pollsters and most commentators having convinced themselves of the result. Unwinding a near-one-way bet inevitably sparked a violent overshoot – and the post-referendum drop from $1.50 to $1.33 was alarming.

Consider, though, the UK’s £32.6bn external deficit during the first quarter – almost 7pc of GDP, a near record-high. While a lower pound is costly to some, any competitive advantage for our exports is welcome. Remember, also, that back in 2010, when the UK faced a hung Parliament, the pound similarly tanked. But it soon recovered, once the markets realized the Coalition could work.

I’d predict a similar bounce-back once politics becomes less febrile and traders realize Brexit is unlikely before 2018. On top of that, now Project Fear is relenting, more economists are arguing Britain could benefit from being outside the EU – given less regulation, our leverage in talks over the single market and scope to do trade deals further afield.

There’s a growing sense, too, the euro and not the pound could ultimately end up weaker. While Britain can survive Brexit, can the EU? Italy is enduring a slow-motion banking crash, with non-performing loans now an astonishing 20pc of GDP. In Germany, shares of the once-mighty Deutsche Bank just hit a 30-year low. Since the referendum, Eurozone stocks have suffered far more than in Britain. Brexit, after all, seriously questions “European solidarity” – the same solidarity that, over the last 5 years, has just about prevented the euro from imploding.

Just as the pound was strengthening on Thursday, the Bank of England indicated a “significant chance” of even lower UK interest rates and perhaps more quantitative easing. ”The economic outlook has deteriorated and some monetary policy easing will likely be required over the summer,” said Bank Governor Mark Carney.

Shares spiked and the pound came down. Having been critical of QE beyond the initial £50bn cash injection after the 2008 Lehman collapse, I feel this announcement is also a mistake. QE reassures financial markets until, quite suddenly and a time no one can ever know, it does exactly the opposite.

Remain campaigners call Brexit “a leap in the dark”. This phrase was coined to criticize the Reform Act of 1867, which extended voting rights to the urban working class. The British people have shown wisdom and courage in backing Brexit. Our leaders must now make sure it happens in a manner that restores faith in politics, as our financial authorities do what they should – and less may be more – to hold the ship steady.